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Life Industry
Wednesday, February 1, 2006
Minimum standards

The minimum standards on early termination values for retirement annuities and endowments are set to cost the life assurance industry around R2,6 billion.

The minimum standards will be retrospective to 1st January 2001, and the implementation date is 1st October 2006.
Life Offices’ Association (LOA) chairman Mike Jackson says the costs would be carried by the life companies themselves from shareholders’ funds and reserves and would not be subsidised by policyholders in any way.
He notes that the standards would significantly enhance the value of long-term savings and investment policies terminated in the first few years (please see accompanying graph below).
According to the standards for all RAs that have been terminated early from 1st January 2001 as well as endowments that have already been made paid up but are still on the books, there will be a minimum value of 65% of the investment account. For RAs that have lapsed the benefit upliftment will be handled on application by the former policyholder. For paid up RAs and paid up endowments the relevant amount will be credited to the value of the policy and this benefit upliftment will be communicated to the policyholder.
For RA’s and endowments that are made paid up after the implementation date, there will be a minimum value of 70% of the investment account. For endowments that are surrendered and RAs where the funds are transferred from the company, after the implementation date, there will be a minimum value of 60% of the investment account.


There will be no retrospective application in respect of surrendered endowments.
Mr Jackson says the standards are set to improve the situation for policyholders who were forced by circumstances to exit their savings or investment policies early during the course of the past five years, and going forward they provide peace of mind to consumers who may be forced to exit early due to significant changes in their circumstances.
He emphasises that policyholders should only consider the termination of their contracts as a last resort. “For those policyholders who manage to stay in their contracts for a relatively long period of time the impact of related charges is lessened and they are likely to receive more than the minimum standards require. 
“It is in their best interest for policyholders to stay in their contracts until maturity. Charges related to the policy are then recovered over the full length, and the fund gets the full benefit of both compound interest and of being in the market for a longer period of time.”
 

Copyright © Insurance Times and Investments® Vol:19.1 1st February, 2006
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